Lastly, with the stock market continuing to go up, many investors fear the bubble is about to burst and preferred to diversify into investing in overpriced multifamily properties, confident that rents and property values will go up in the future. A fifth factor is that multifamily properties are without doubt the most popular type of commercial property and are even more in demand. Fourthly, to compound this further, banks tightened underwriting and are still shy about lending on new commercial construction today due to the uncertainty of market rents, rental concessions, rental collections, and the time for absorption. Thirdly, because of the stress the coronavirus put on the economy, almost all apartment starts were either delayed or canceled. Secondly, it is thought to be due to an increased need for housing with vacancies averaging just below 3%, and rents rising at over 8% which theoretically should push prices up. Why has this happened? First, this started with residential property values skyrocketing and many multifamily sellers waiting for prices to go up substantially before they put theirs up for sale. This is thought to be a result of the Coronavirus Recession, which unlike the Great Recession which was caused by a runaway subprime loan market.Ĭonversely, multifamily apartment properties in this recession have been going up in value pushing cap rates way down. Today we are at a similar place, with multifamily prices at an all-time high as a result of inventory for apartment buildings for sale being at an all-time low. The real estate market was also in the hyper-supply phase (see more about this below), which usually means you are buying at the top of the market. The recession was caused by a 6 year bull market where commercial real estate prices kept going up reaching unrealistically high prices that were not supported by reality. In 2008 when the Great Recession hit, multifamily property values went down or remained flat. Value-added properties dropped by an average of 60 bps, which makes it much riskier to reposition or rehab these (See more about this below) 5 Reasons Why Multifamily Apartment Cap Rates are so Low This just doesn’t make sense when you consider the increased cost for repairs and maintenance with an older Class C property. For the first time, quality Class C properties in good neighborhoods are selling for just about the same cap rate as Class B properties. Suburban C Class properties experienced the largest cap rate decline by 76 bps or an increase of $76,000 for a million-dollar property. Over the past year, multifamily cap rates in all asset classes fell by an average of 54 bps which on a million-dollar purchase equals an increase in value of $54,000. About Multifamily Apartment Cap Rates TodayĪuthor of: “ The Encyclopedia of Commercial Real Estate Advice”